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Industry Outlook Industry outlook 39 Resilience, recovery, acceleration by Sir Martin Sorrell S4Capital Annual Report and Accounts 2020 37 Industry outlook 38 S4Capital Annual Report and Accounts 2020 2 Digital adoption has accelerated On the whole, covid-19 didn’t create Resilience, new trends; it accelerated existing ones. Digital adoption was stepped up by consumers. During the early days of the pandemic some 30% of US households recover y, went online for groceries for the first time; online education took off; and streaming went through the roof. Disney+ was targeting 70-80 million consumers by 2024, but it acceleration rapidly went to 100 million (and forecasts 240 million for 2024) and found itself competing with Netflix. By Sir Martin Sorrell Alan Jope tells the story that when he was running Unilever in China during the SARS outbreak, there was this massive surge among You have to find the silver linings Chinese online; in 2020 we saw a similarity The nature of our client base contributed when Nike gave away their fitness app to significantly to our resilience during the the Chinese consumer for free – it sparked a pandemic. Technology and healthcare significant uptick in online activity. together account for more than half of our The tech giants, whether Google, Facebook client spend and those were sectors that and Amazon, or Alibaba, Tencent and Tik- didn’t stop their marketing and in some Tok are all set to emerge from the pandemic cases reinforced it. Our people played a huge stronger than ever. Digital adoption has part; they are entrepreneurial and can turn also been stepped up at enterprise level. on a sixpence. And our values of ‘speed, Before the pandemic, fmcg companies were quality, value’ or ‘faster, better, cheaper’ jogging along at 2% or 3% or 4% each year were paramount. with no inflation, zero pricing power and EPS During lockdown, clients were more available gains squeezed from focus on costs and than ever before and wanted to talk about share buybacks. the challenges they faced, at a time when our Covid-19 blew a hole in that, and as a result competitors were often hiding from view. the change agents in these companies have Then we found three revenue streams that been given much more oxygen. The package simply exploded. Animation – as any of the goods companies started deploying more Hollywood studios will attest – went vertical, money to digital because that’s where the for the simple reason that you don’t need harder sell can be made at times like these. people. Robotics was another. When we And as one ex-CMO told me: “If Amazon isn’t acquired Caramel Pictures, we’d laughed that copying your business model, you don’t have we’d bought more robots than people, and a good one.” now that proved prophetic. The third area was the conversion of live events to online events, which enabled us to deliver some very effective virtual experiences for major clients. S4Capital Annual Report and Accounts 2020 39 Industry outlook Resilience, recovery, acceleration continued Pandemic patterns World economic outlook growth projections Vertical Shape January 2021 Technology & telecom V World output Data & analytics V 5.5 Ecommerce V 4.2 FMGC/CPG V/U 2.8 SMB/Agencies U/L Travel & leisure L 2019 2020 2021 2022 Financial services V Retail online V -3.5 Retail offline L Advanced economies Auto U/W 4.3 3.1 Media & entertainment V/U 1.7 Pharma/healthcare V Telemedicine V 2019 2020 2021 2022 Fashion & luxury U -4.9 Emerging markets and developing economies 6.3 5.0 3.7 2019 2020 2021 2022 -2.4 Source: imf.org Revenue of +35% selected tech 260.5 companies 2020v2019 Q3 +4% 193.1 2019 2020 182.7 175.8 +9% 125.6 +13% 115.8 110.2 97.3 +17% 57.9 49.6 Sources: Statista; company filings 40 S4Capital Annual Report and Accounts 2020 2 A reverse square root recovery advertising would go up a bit faster. Right now During 2020, I was sent an employment graph I believe that’s true specifically of digital for US non-farm payrolls. It was eerie, it showed advertising. Brightblue – MightyHive’s data a square root sign precisely in reverse: a sharp analytics and measurement consultancy – fall followed by a sharp recovery, but not quite ran an analysis and what they found was to the levels it was before. That’s going to be a strong correlation between digital ad the overall shape of the economic recovery, spend and consumer confidence. That has but there’s quite a lot of variation in between. implications for media. Print won’t disappear, In sectors like tech and healthcare, games and but newspapers will increasingly go online. online financial services, online education and And streaming services will open up to online groceries it has already looked like a V. advertising. Last summer the millennials in the In fmcg, autos and luxury goods it could be house where I was staying were amazed when more of a U or even a W. And for the hardest hit I put on Spotify and it had ads between the sectors – travel, hospitality and offline retail, for songs. My view is that Netflix will go the same example – it will be more of an L. In the worst way; it will take ads and keep ad-free content cases it could even be chair shaped, but we at a premium price. So traditional TV channels haven’t come across this yet. are going to be under new pressure from the streamers. I’m very bullish on 2021, which will be like 2010 all over again, and on 2022, when the The old and the new general forecast is for global GDP up 4-4.5%. “A foolish consistency is the hobgoblin of little (When was the last time we saw GDP growth minds,” Ralph Waldo Emerson once wrote, at those levels?) One reason for optimism is by which he meant that doing things the same that governments are going to pump-prime the old way will get you nowhere. The holding recovery. During the Global Financial Crisis, company idea has been around for far longer it took a long time for US Treasury Secretary than people realise (Marion Harper invented it Hank Paulson to get Congress to agree to at IPG in the 1950s when he saw it as a way the TARPs (Troubled Asset Relief Programs) to grab extra market share). because people thought the banks were to The advertising holding companies were trying blame, so why bail them out? But this time to simplify their structure before covid-19 covid-19 has affected everybody, so morally came along, but if anything, they’ve become governments have to get everybody back on more vertical. They’ve also had to cut jobs and their feet. Of course, it’s not going to be even: seen their profits disappear as the pandemic China has made an astonishing comeback, exposed their frailties. So our view, that the others like Brazil have been much harder. only solution is for private equity to break But the next two years are going to be strong. them up, hasn’t changed. Otherwise, they will We are crossing a rubicon become zombies, or the walking dead. From now on, most advertising will be To change something, you build a new model digital. Magna reckoned that in 2020 global that makes the existing one obsolete, said advertising shrank by 4.2%, but spending another wise old bird, Buckminster Fuller, and on digital formats rose 8% to reach an that’s what we’ve done. Today the holding overall share of 59%. WPP put the growth companies aren’t our biggest competitor, in digital at 5%. Whatever the actual figure, it’s Accenture. what’s clear is that from now on, digital is In the last 12 months, our own model – digital going to be the majority of all advertising. only; our holy trinity of first-party data, digital MoffettNathanson has predicted 20+% content and digital media; faster, better, cheaper; growth for US digital in 2021, and a market and our unitary structure – has gained significant share of nearly 70% by 2024. traction. We’ve passed the phases of brand When I worked at Saatchi & Saatchi in the awareness, brand trial, and proof of concept. 1960s and 1970s, we always reckoned We are well on course in our ambition to make that if GDP went up in the UK by 1%, then us the relevant agency of the next decade. S4Capital Annual Report and Accounts 2020 41 Industry outlook Resilience, recovery, acceleration continued US ad 90% dollars mix 80% 1996–2024E 69% 70% 60% 50% 46% 44% 40% 30% 34% 23% 22% 20% 19% 11% 10% 14% 5% 9% 3% 0% 1 7 4 2 3 5 8 9 0 6 7 8 9 6 1 7 2 4 5 3 8 9 6 0 1 1 1 1 1 1 1 1 1 1 9 0 0 9 9 9 0 0 E 0 0 0 0 0 E E E E 0 0 0 0 0 0 0 0 0 0 9 1 0 0 9 9 9 0 0 0 0 0 4 0 0 00 2 3 0 2 2 2 2 2 2 2 2 2 2 1 1 2 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 0 0 0 0 0 2 2 2 2 Print TV Other Online 2 Source: MoffettNathanson Global 0.80% advertising spend as a % of GDP 0.60% 0.40% 0.20% 0.00% 2010 2012 2014 2016 2018 2020 2022 Total spend Analogue Digital Source: ZenithOptimedia 42 S4Capital Annual Report and Accounts 2020 2 Growing our whoppers at scale: winning big.
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